CA FOUNDATION NOTES

The Companies Act, 2013

Introduction:
• The Companies Act, 2013 was enacted to consolidate and amend the law
relating to the companies. The Companies Act, 2013 was preceded by
Companies Act, 1956.
• The Companies Act, 2013 contains 470 sections, 7 schedules and is
divided into 29 chapters.

Applicability of the Companies Act, 2013:

• Companies incorporated under this Act of under any previous law.
• Insurance companies (subject to the provisions of the Insurance Act or
IRDA Act, 1999).
• Banking companies (subject to the provisions of the Banking Regulation
Act, 1949.
• Companies engaged in the generation or supply of electricity, (subject to
the provisions of the Electricity Act).
• Any other company governed by any special act for the time being in
force,
• Such body corporate, incorporated by any act for the time being in force,
as the Central Government may, by notification, specify in this behalf.

Meaning of a Company:
Section 2(20) of the Companies Act, 2013 defines, A company is a company
incorporated under this Act or under any previous company law.
Chief Justice Marshall – “A corporation is an artificial being, invisible,
intangible, existing only in contemplation of the law. Being a mere creation of
law, it possesses only the properties which the Charter of its creation confers
upon it, either expressly or as incidental to its very existence.”
Prof. Haney – “A company is an incorporated association which is an artificial
person created by law, having separate entity, with a perpetual succession and
common seal.”

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Features of a Company:

Separate legal entity

Perpetual succession

Limited liability

Artificial legal person

Common seal

1. Separate legal entity:

• When a company is registered, it is clothed with a legal personality.
• This feature provides the company with all the rights that a human
being of that country enjoys.
• Its existence is distinct and separate from that of its members.
• The company gets the power to sue any company individually, can
also acquire property, can open a bank account in their name, also
can get loans from banks in their name.
• A company is capable of owning, enjoying, and disposing of property
on its own name. Although the capital and assets are contributed by
the shareholders, the company becomes the owner of its capital and
assets.
• A member does not even have any insurable interest in the property
of the company.

• Case Law: Macaura Vs. Northern Assurance Co. Ltd (1925)

Fact of the Case:
o The owner of a timber estate sold the timber to a company in
exchange for stock in the company.
o As a result, M (Macaura) was the major shareholder of the
timber company and was also its creditor to a large extent.
o He obtained a policy on the timber in his own name. He made a
claim for the loss to the insurance company after the fire burned
the timber.
o But the insurance company refused to settle the claim.

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 Issue:
Is the insurance company liable to pay compensation to M for the loss
incurred?

Court Judgement:
o Since the timber was not insured under the company’s name,
the insurance company was found to be exempt from liability
towards M.
o The timber belonged to the company, and therefore, only the
company could obtain an insurance policy for it.

2. Perpetual succession:
• Members may die or change, but the company goes on till it is wound
up on the grounds specified by the Act.
• Since a company is an artificial person created by law, law alone can
bring an end to its life.
• Its existence is not affected by the death or insolvency of its
members.
• Example: There was a company which has 7 members and all of them
died in an aircraft. Despite this, the company still exists unlike
partnership form of business.

3. Limited liability:
The liability of a member depends on the kind of company of which he is
a member.
a. Limited liability company: The liability of the members of the
company is limited to the extent of the nominal value of the
shares held by them.
b. Company limited by guarantee: The members are liable only to
the extent of the amount guaranteed by them and that too only
when the company goes into liquidation.
c. Unlimited company: The liability of the members is unlimited in
the case of an unlimited company.

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 4. Artificial legal person:
• A company is called an artificial person by law.
• It is also called a legal person because it can enter into a contract,
own property in its own name, sue and be sued by others, etc.
• It can do everything which any natural person can do except be sent
to jail, take an oath, marry or practice a learned profession.
• Also, it is not human, but it acts through human beings.
• It is called an artificial person because it is invisible, intangible and
exists only in the eyes of the law.

5. Common seal:
• Since a company is an artificial person, it cannot act on its own. It acts
through its Board of Directors.
• The common seal is the official signature of a company, which is
affixed by the officers and employees of the company on its every
document.
• The Companies (Amendment) Act 2015 has made it optional for the
companies to have a common seal.
• In case a company does not have a common seal, the authorization
shall be made by two directors or by a director and the Company
Secretary, wherever the company has appointed a Company
Secretary.

Corporate Veil:
• The term Corporate Veil refers to a legal concept that members of a
company are shielded from liability connected to the company’s actions.
• If the company incurs any debts or contravenes any laws, the corporate
veil concept implies that members should not be liable for those errors.
Case law: The case of Salomon v. Salomon and Co. Ltd
• In Salomon vs. Salomon & Co. Ltd. the House of Lords laid down that a
company is a person distinct and separate from its members.
• In this case one Salomon incorporated a company named "Salomon &
Co. Ltd.", with seven subscribers consisting of himself, his wife, four sons
and one daughter.
• This company took over the personal business assets of Salomon for £
38,782 and in turn, Salomon took 20,000 shares of £ 1 each, debentures
worth £ 10,000 of the company with charge on the company's assets and
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 the balance in cash. His wife, daughter and four sons took up one of 1
share each.
• Subsequently, the company went into liquidation due to a general trade
depression. The unsecured creditors to the tune of f 7,000 contended
that Salomon could not be treated as a secured creditor of the company,
in respect of the debentures held by him, as he was the managing
director of one-man company, which was not different from Salomon
and the cloak of the company was a mere sham and fraud.
• This case clearly established that the company has its own existence and
as a result, a shareholder cannot be held liable for the acts of the
company even though he holds virtually the entire share capital. The
whole law of corporation is in fact based on this theory of separate
corporate entity.
Lifting the veil: It means looking behind the company as a legal person, i.e.,
disregarding the corporate entity and paying regard, instead, to the realities
behind the legal facade. Where the Courts ignore the company and concern
themselves directly with the members, the corporate veil is said to be lifted.
1. To determine the character of the company i.e. to find out whether co-
enemy or friend:
Daimler co. Ltd v/s Continental Tyre & Rubber co. Ltd.: It was held that a
company will be regarded as having enemy character if the persons
having de facto control of company are residents of enemy country or
wherever they maybe they are acting on instructions of enemy.

2. To protect revenue/tax:
Dinshaw Maneckjee Petit:
• The assessee was receiving huge dividend and interest income,
and he created three companies to reinvest the income for
reducing the tax burden.
• The companies were having no business other than receiving
investment and giving back to assessee as a pretended loan.
• It was held that company was not more than the assessee himself
and the assessee was held liable to pay the tax.
• The Court decided that the private companies were a sham and
corporate veil was lifted to find out the real owner of the income.

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3. To avoid a legal obligation: Where it was found that the sole purpose for
the formation of the company was to use it as a device to reduce the
amount to be paid by way of bonus to workmen.
The Workmen of Associated Rubber Industries Limited vs. The Associated
Rubber Industries Ltd.:
• The facts of the case are that "A Limited" purchased shares of "B
Limited" by investing a sum of 450,000.
• The dividend in respect of these shares was shown in the profit
and loss account of the company, year after year. It was considered
for the purpose of calculating the bonus payable to workmen of
the company.
• Sometime in 1968, the company transferred the shares of B
Limited to C Limited, a subsidiary, wholly owned by it. Thus, the
dividend income did not find place in the Profit & Loss Account of
A Ltd., with the result that the surplus available for the purpose for
payment of bonus to the workmen got reduced.
• Here a company created a subsidiary and transferred to it, its
investment holdings in a bid to reduce its liability to pay bonus to
its workers.
• The new company so formed had no assets of its own except
those transferred to it by the principal company, with no business
or income of its own except receiving dividends from shares
transferred to it by the principal company and serving no purpose
except to reduce the gross profit of the principal company to
reduce the amount paid as bonus to workmen.

4. Formation of subsidiaries to act as agents: A company may sometimes

be regarded as an agent or trustee of its members, or of another
company, and may therefore be deemed to have lost its individuality in
favour of its principal. Here the principal will be held liable for the acts of
that company.
Merchandise Transport Limited vs. British Transport Commission (1982):
• A transport company wanted to obtain licenses for its vehicles but
could not do so if applied in its own name.
• It, therefore, formed a subsidiary company, and the application
for license was made in the name of the subsidiary.
• The vehicles were to be transferred to the subsidiary company.

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 • Held, the parent and the subsidiary were one commercial unit and
the application for licenses was rejected.

5. Company formed for fraud/improper conduct or to defeat law: Where

the device of incorporation is adopted for some illegal or improper
purpose, e.g., to defeat or circumvent law, to defraud creditors or to
avoid legal obligations. [Gilford Motor Co. vs. Horne]

Classes of Companies:
Private Company [Section 2(68)]: Private company means a company having a
minimum paid-up share capital as may be prescribed, and which by its articles,
i. restricts the right to transfer its shares.
ii. except in case of One Person Company, limits the number of its
members to two hundred:
Provided that where two or more persons hold one or more shares in a
company jointly, they shall, for the purposes of this clause, be treated as a
single member:
Provided further that—
a. persons who are in the employment of the company; and
b. persons who, having been formerly in the employment of the company,
were members of the company while in that employment and have
continued to be members after the employment ceased, shall not be
included in the number of members; and
iii. prohibits any invitation to the public to subscribe for any securities of
the company

Important points:
• no minimum paid up capital required.
• Minimum members 2, maximum members 200. (excluding present and
past employees)
• Right to transfer shares restricted.
• Prohibition on invitation to subscribe for shares to the public.
• Small company is a private company.
• OPC can be only formed as private company.

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Small company [Section2(85)]: A company other than a public company
whose:
i. Paid up share capital does not exceed 4 crores.
ii. And annual turnover should not exceed 40 crores.
This clause shall not apply to:
a. Holding or subsidiary companies
b. Companies registered under Section 8
c. A company or a body corporate governed under a special act.
Public company [Section 2(71)]: Public company means a company which is –
i. Not a private company
ii. Has a minimum paid up share capital as may be prescribed.
Provided that a company which is a subsidiary of a company, not being a
private company, shall be deemed to be public company for the purposes of
this Act even where such subsidiary company continues to be a private
company in its articles.

Important points:
• Not a private company
• Shares freely transferrable
• No minimum paid up share capital required
• Minimum members 7
• Maximum members – unlimited
• Subsidiary of a public company is deemed to be public company.